Myth #1: Higher Taxation will lead to loss of Jobs
This is an argument made by small business owners all the time. They say that they will have less money to hire people. Every business makes its decision to hire or invest capital based on the return it can expect on the investment. The investment decision is not based on the amount of money they have left over. Many businesses have cash loaded on their balance sheet as they don’t see good opportunities in this economic environment to earn a good return on their investments. A higher tax rate will not automatically increase the unemployment rate.
Myth #2: Higher Taxation will slow down consumer spending
It all depends on how the tax rates are structured. A household with higher than $100k in earnings are saving rather than spending all their disposable income. A higher tax rate is needed today to fund the deficits of the govt. The govt. in turn uses those taxes to pay the salary of all its employees and pay for the social programs and govt. infrastructure. A higher tax rate shifts some of the disposable income from the private workforce to the govt. This should also slow down the layoffs of the govt. The higher taxes won’t hit consumer spending in a big way as the upper middle class is saving, not spending their extra cash. Higher tax rates are preferable to the alternative of long-term deficit spending and govt defaults.
Myth #3: Taxes need to be fair
Taxes are usually progressive in nature, with the tax rate increasing as the taxable base amount increases. It serves to reduce income inequality in the society. It doesn’t do any good to raise taxes from minimum wage people when they spend all their income on basic life necessities. Flat tax rates are cruel to the poor and the govt. will have to come back to support them with more social programs. So it is inefficient to tax the poor.
Myth #4: Higher taxes will lead to movement of capital to other lower tax countries
Capital moves around the world based on relative net returns. A higher tax rate may reduce net returns in the USA but it may still produce greater relative returns. Capital is not going to move to Mongolia because they have zero tax rates. Companies are not going to abandon the USA because of higher tax rates – the consumers are here and they have to market their products to their consumers.
Myth #5: Lowering the Tax rate will bring in more Tax revenue dollars
This is usually called the Reganomics, referring to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s, also known as supply-side economics. President Reagan did actually increase taxes twice during his term. This effect is true when the top marginal tax rate is high, like 70%. The top marginal tax rate is currently only 35% and the average tax rate is more close to 15%. A 1% reduction in the tax rate would reduce taxes to the population by 0.01*2.162 trillion = $21.62 billion. The federal govt will only collect the same level of taxes if the $21.62 billion freed up for the consumers have a money multiplier factor of atleast 6.7 to the GDP (=21.62*6.7*0.15). Tax rebates during the D.W. Bush presidency were mostly saved and not spent. Tax cuts have more effect when they are lowered from very high rates.
Myth #6: Higher Income taxes are communist policies
Communist govt policies usually takeover of the assets of the individual citizens. A communist govt owns all the country’s assets. Income taxes are not about taking over the assets of individuals but taking a portion of the income realized from those productive assets to fund the govt. If an entity earns zero income from its assets, the income tax would be zero. An income tax rate greater than 50% does reduce some of the motivation to earn the income. As the famous economist Laffer pointed out – Taxes would be zero at 0% tax rate and 100% tax rate.
Myth #7: Just tax the super-rich to close the govt deficit
There isn’t enough super-rich to tax to close all the govt deficit. The US govt ran a deficit of $1.3 trillion in 2011. The top 1% of americans had an AGI of $1.685 trillion dollars in 2010 and they paid $392 million in taxes (average tax rate of 23.27%). They had an after-tax income of $1.293 trillion and we would have to tax that at 100% to close the govt deficit. The top 50% has to contribute in some fashion to close the deficit gap. It cannot be achieved by taxing the top 1% or the top 5% of the taxpayers.
Myth #8: Taxes should be simple
Taxes by their very nature become complex. The salary or revenue is easy to know. The complex part is all the deductions allowed on an individual’s income to arrive at the Taxable income. The deductions are there for various social, political and economic reasons. There is no reason to have a mortgage interest deduction but the federal govt has instituted it to raise home ownership – how much di d the home builders’ lobby have an influence on this? Now that it is there, it is very difficult to get rid of. It is the case with most of the deductions. Every politician during the presidential election season will present his/her own simplified tax policies which are never practical to implement.
Myth #9: Taxes should be abolished and there is no need to balance the budget
There is a small group of people still in the US that refuse to pay taxes based on the notion that taxes are unconstitutional. That aside, any govt should have checks and balances and one of those checks are its revenue vs spending. The govt. cannot keep spending on deficits continuously – it is not sustainable. It will lead to lack of credibility in the currency of the nation as a long-run deficit spending is equivalent to printing more paper currency. It will eventually lead to the debasement of the dollar and cause huge economic catastrophes. The loss of confidence and the subsequent economic problems don’t happen gradually but happen suddenly.
Myth #10: Deficits should always be closed by reducing govt spending
There are two issues around taxation – how to structure it (where everybody wants to tax the other guy) and what is the appropriate size of the govt. The Republican camp wants to cut the size of the govt to close the deficit and the Obama camp wants to raise taxes to close the deficit. Lost in this argument is the need for a dialogue on an appropriate size for the govt. The federal govt doesn’t operate in a competitive environment and its spending is not based on a ROI. So the question should be as to whether the govt is spending its money efficiently. The answer doesn’t lie in shrinking the govt to the size of its current revenue base. The govt does perform an important function in providing public services to our nation. Raising taxes and shrinking the govt size should both be on the table.
